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The Union government’s decision to waive, through an amendment to the Income Tax Act, minimum alternate tax (MAT) liability on capital gains made by foreign portfolio investors (FPIs) and Foreign Institutional Investors (FIIs) is a welcome move, especially from their point of view. It is in line with the spirit of the promise in the BJP’s manifesto for the 2014 general elections to put an end to “tax terrorism”. The announcement and the subsequent instructions issued to the tax department to keep in abeyance, till the appropriate amendment is carried out, pending proceedings and to not pursue the recovery of outstanding demands in such cases is a big relief to FIIs. In these times of heightened uncertainty in the global financial markets, when risk appetite of investors is especially low, the government’s decisions would serve to restore some of the lost faith of investors in India as an investment destination that doesn’t resort to “retrospective taxation”. But to further demonstrate its resolve, the government must also move to rein in the tax department, which had served notices on 68 FIIs for MAT dues adding up to about Rs.600 crore on the basis of a direction from the Authority for Advance Rulings in 2012 to a Mauritius-based investor Castleton. In 2010, this investor had approached the Authority seeking a confirmation that it was not required to pay MAT on a transaction it was planning to execute. The department has been in too many disputes with global companies such as Vodafone and Cairn, some of which have even dragged India into international arbitration. It has been said that India’s image as an investment destination has suffered as a result.

The same way as the government has taken a position on and dispelled the uncertainty around MAT, it must quickly make up its mind and come out with an announcement on another outstanding issue, concerning participatory notes (P-Notes). India’s indecision on this matter is affecting FIIs. The Supreme Court-appointed Special Investigation Team has asked regulators to put in place regulations to identify individuals holding P-Notes and take other steps to curb black money and tax evasion through the stock market route. P-Notes are offshore derivative instruments that a large number of FIIs use to park funds in the equity market without disclosing their identity to Indian regulators. The tax authorities suspect that a huge chunk of these investments could in fact be Indian money masquerading as foreign funds. The government had said it won’t immediately act on the recommendation after the stock markets reacted sharply to news on it. But sooner or later it will have to decide what has to be done, given that action against black money too was a big election-time promise of the BJP. The MAT experience shows that sooner is better than later.

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